Tuesday, February 22, 2011

Here are some interesting charts and graphs on wealth disparity in the United States. Do you guys think the top 1 % has been especially productive and innovative while everyone else has lagged behind, or is their immense concentration of wealth due to our current tax code? It's likely both, but I think this could get a good conversation going.

On the taxing issue, how does everyone feel about the Bush Tax Cuts, or just increasing taxes on the rich? I think that these charts show a necessity for more progressive taxation, but that seemed to be a political impossibility when this debate last happened in 2010 (Dems proposed keeping cuts for everyone under $250,000, and then under $1,000,000, but Republicans were having none of it, which led to a 2 yr extension of all cuts.)

Last thing, does our society have a moral responsibility to raise taxes on the wealthy rather than cut programs that the poor depend on? Even if your a conservative Republican, increasing taxes on people who make $250,000, $1,000,000 or more should make more sense than a lot of the GOP's proposed spending cuts. These tax increases would also do a lot more to reduce the deficit.

39 comments:

While I agree that the rich have a duty to share a larger portion of taxes than anyone else, I disagree that wealth inequality is the problem. There is no evidence that the richer the rich become the poorer the poor become. The Pareto principle states that an outcome is good if it makes someone better off without making anyone worse off. Why are we worried about economic growth among the rich? The rich are not taking from the poor. I think that the real problem is not wealth inequality, it is poverty. Policy needs to aim to reduce the barriers that keep the poor from being as productive as they can be in society. These barriers include unequal education, racial and sexual discrimination, and unequal resources. Although I believe the rich have a duty to bear a big portion of the tax burden, and support the poor, I think policy's ultimate goal should be to remove the barriers that keep the poor poor. Massive wealth re-distribution is not the way to go.

I think the point is more that the graph on the right seems to suggest that the rich (top 1%) have gotten exponentially richer, while everyone else's income has remained stagnant. A sound policy should not so much target the wealthy as try and answer the question of why this is the case, and see if lawmakers can do anything to bring that kind of economic prosperity to the other 99% of the population. I think Peter is right to suggest that at least part of it is a result of our current tax system.

I guess I would just argue that the Bush Tax Cuts did cause a massive re-distribution of wealth that favored the country's richest citizens, and that resetting it to normal levels would make sense. I don't know all the details, but I'm fairly sure that since Reagan the rich have gotten richer and richer, while the poor and middle class have dealt with stagnating wages. This is especially true since the enactment of the Bush Tax Cuts, so I would argue there that such excessive cuts for the rich could have made the poor worse off. Their depletion of our revenues also leave the poor worse off because less revenue means fewer services. These services generally help the poor play on a more level field in the sense you were describing about equal education, equal resources and so on.

The website that you got your graphs from shows an outline of the tax rates for the 20th century [4 graphs below the one cited]. Let us not forget that the 20th century "tax cut" behavior began with Democrat Lyndon Johnson. It's not all Republican folks...

That was almost 50 years ago and was not based on the questionable Laffer curve that arose during the Reagan administration and is still sacrosanct to a large number of Republicans today. LBJ also only cut it to something around 55%, which seems reasonable if not still on the high side. His tax policy seems more practical than ideological. If taxes are too high, I agree they should be cut, but continuing Bush's cuts that have not really had a positive effect on our economy (except for in regards to the rich and very rich) is reckless and arguably immoral.

What an excellent topic for discussion- I’ll definitely be posting tonight when I have a chance to do more in-depth. For now, a few quick thoughts1) Megan- someone was paying attention in Economics of Poverty! 2) I generally agree in that inequality itself isn’t a problem, so arguments based on the need for income or wealth redistribution for the sake of redistribution and equality itself are suspect (for me). 3) However, and this is something I think I’ve harped on before on this blog, is that incredibly concentrated wealth and income accumulations can be problematic for creating robust and sustainable growth. Basically, rich people might do so well in the medium-term (decades) that they are shooting the country in the foot over the long-run. The 2000s are a great example of what people theorize might happen if growth is not broad-based (shared by most of the country’s population). There is no question that the economic data generally shows us that the 2000s were a period of seemingly strong growth that was generally driven by a housing bubble and massive accumulations of wealth and assets in the financial sector. There also appears to have been a decoupling between productivity and other traditional signals (i.e. GDP growth itself) for ensuing prosperity- basically large segments of the American population didn’t seem to be experiencing similar trends as experienced by the top .1% of the population. That top .1% of the population’s success was so great that it creates the appearance of aggregate prosperity, when really there was widespread stagnation or minimal growth. The story is a little complicated because housing assets (which are the primary source of wealth for vast swaths of the American population, including large numbers of American households who actually have negative net assets) were so inflated in the recession, so it’s possible that the situation has gotten a lot worse for many Americans after the point where we have reliable data. Some economists argue that the housing bubble and financial sector excesses are related to this unusual distribution of wealth and income during a period of economic growth, and that without a broad-base for growth, our economy in the future is likely to experience high levels of volatility similar to what we have seen in the past several years. Obviously, those kinds of financial market recessions are far more problematic than your run-of-the-mill recession, which in all honesty is almost a necessary resetting of the very complex system we call our “economy.” (Of course- after everyone where we experience a few years of growth, there’s been this freakish trend where economists come out with pronouncements that we’ve outgrown recessions and that our understanding of economics is so advanced that it’s milk and cookies for as far as the eye can see- but then when we have an inevitable downturn, economists turn a blind-eye to what they had previously said, or allowed the media to perceive, about their understanding of the economy and growth prospects. But that’s a sidebar- sorry for my rant). Ok, so there’s an argument as to why inequality is problematic and destructive for the nation at large. It’s really an updated version (due to our recent experience with the “Great Recession”) of the historical thesis that a strong middle class is essential for explaining economic development and growth.

4) There are additional arguments about whether there is increasing economic inequality and whether that’s detrimental. For now I’ll just stick to one you inadvertently bring up Megan, when you discuss how you think the bigger issue than inequality is poverty. You mention a number of barriers to equal opportunity, something which I’m glad and not surprised you recognize, but an awareness that many of the most conservative Americans don’t seem to want to accept. Personal sidenote- which I know no one cares about, but hey it’s a blog so I’m allowed to make personal comments and people can just skip over them if they want. My political shift from right to left really began when I just got fed up with conservatives’ and Republicans’ way of over-discounting the serious problems in our current society. I totally accept that government action has many detrimental effects which should be balanced against the benefits of government intervention, but I also believe that many people who say they’re for “equal opportunity, but not equal outcomes,” really aren’t for equal opportunity because they heavily underestimate how strong and detrimental the many barriers to social mobility and equal opportunity are in this country. I can only wonder whether that discounting might be correlated with a privileged background which gives them an inherent incentive to turn a blind-eye on the disadvantages of others and their own head-start. Similar to psychological disassociation- they do it in order to avoid confronting the pain of their own existences. Back to the point, excessive economic inequality can be a barrier to the improved (since perfect is unattainable) social mobility that would result in an optimal distribution of society’s resources (aka people). Too much inequality (though there will always be some in any functioning system) can strengthen the barriers to social mobility. For instance, many believe that educational opportunities are important for social mobility (Sociologists advocate this strongly, though some economists are starting to question this accurateness of this proposition). Wealth and privilege allow many American families to spend enormous sums of money on educational institutions which advantage their children over those of middle-class, working, and poor families. Society might currently suffer from an overinvestment in the children of the top 2% of American society, and it might benefit from a more equalized distribution of education funding that gave all children similar opportunities to excel. Now I acknowledge the way I framed this argument is in a theoretical context related to education, which opens itself up to reality-based attacks. However, I was simply trying to point out how in theory there can be excessive levels of inequality in a country in that they perpetuate and exacerbate barriers to equal opportunity that allow a society to “economize” it’s most important resource, people.

This theoretical argument ties into an empirical result of studies which look at social mobility in a comparative (cross-national and historical) context. My understanding is that there are several themes which emerge from this literature- 1) that at many times the U.S. actually had higher social mobility but that this has declined recently; and 2) We have lower social mobility than our peer nations. More specifically, researchers find that we have greater “stickiness,” (lack of movement- evidence of greater barriers) than our peers when it comes to mobility out of the lowest and highest-strata of American society. Basically, fewer Americans are able to escape poverty and wealthy Americans’ children are less likely than their international peers to transition down into lower segments of the American socioeconomic distribution. Poor children are more likely to remain poor throughout their lives than their international peers. It’s harder to bring into affluence in America, and once there you are more likely to be able to maintain that advantaged position. This increased stickiness we see in America is evidence that we have lower social mobility than our peer nations, which might be harmful as it dampens equal opportunity. P.S. Obviously there are other ways in how a society is structured that would affect equal opportunity than just social mobility (aka elements of free-markets promote opportunity and meritocracy compared to more static, statist economic structures). Just to head off some of the inevitable counter-arguments I’m sure people will be making…. And those are just my initial thoughts for now, which as always turned into more than I had initially planned. And of course other people have posted since I started, so now I want to talk about tax policy (btw, have any of you commenting read the line of Hacker and Pierson books??? Just wondering, becuase this is basically their thesis- policy changes explaining outcomes we're seeing in terms of inequality)

I would contend that poor spending on the Wars on Terror is a huge reason for Bush's negative effects on the economy. Now, post-Bush, is it justified to punish the wealthy for the poor Bush-administration decisions? I think it would be unfair to say that it was/is only the wealthy who benefit(-ed) from the Bush Tax Cuts.

I don't think that's unfair to say when you look at the statistics here. Lower and middle class wages stayed the same, while costs of living increased, and upper class incomes shot through the roof. Also, check out the chart on this page, it shows how much of a negative impact the tax cuts had in comparison to the wars (and everything else): http://www.cbpp.org/cms/index.cfm?fa=view&id=3036. Lastly, I don't think that reverting back to sustainable tax rates for the rich should be considered punishment. If we keep those rates where they are now, it is going to be our country that faces punishment through high interest rates, a declining economy, and lack of revenue for essential services.

There is a great deal of discussion about what segments are seeing disproportionate (in a historical sense) increases in income and wealth. Generally I question any argument looking at more than the top 1%, and I think it’s more narrow- either .1% or less of the American population experiencing unusual income and wealth accumulations. Why? There are two arguments I’ve seen that looked reasonable to me and supported by data- 1) massive increases in …. possibilities and opportunities in the financial sectors? I don’t know how to phrase it exactly, but basically people in the financial sector are able to control so much more and more wealth and profit/derive their livings from managing finances. I.e. hedge fund managers and stock brokers- while America has always had its fair share of very wealth capitalists, there were often only a handful who generally managed their own considerable personal and corporate wealth. We now have hundreds, really thousands of people, making millions of dollars each year making financial transactions (and in theory improving the productivity of our economy.) 2) Athletes, musicians, movie stars, etc. are now earning much more proportionate to the average American. With the advent of TV and the broader markets it enables, those at the peak of their fields are able to extract greater premiums on their superior standing and make a great deal of money. I’d point out that this explanation, pointing out these two groups, is one that’s made by those who believe there has been an increase in inequality but that it is generally highly concentrated (I’ve read variations of it in several conservative publications who are pushing back against the broad, sweeping liberal indictment of increasing inequality blamed on the top few percentage points of American society at the expense of the other 90%+. It’s hard to make the argument we aren’t seeing more inequality, so they point out this minimal band of inequality and provide explanations for it with free market stories which imply that government action isn’t to blame or needed as a solution. I would just add that I think this conservative-ish argument pointing to these two factors seems to be valid, but it may be a minimalistic story that underestimates who is benefiting, and whether they are doing so well due to government policy changes in recent decades. I think there is an important policy component to the changes we are seeing.

And now I'm catching up to John's, Peter's, and Professor Eismeier's comments... so much to do

This chart shows how much, on average, each income bracket gets back in the form of Bush tax cuts: http://voices.washingtonpost.com/ezra-klein/2010/08/the_bush_tax_plan_vs_the_obama.htmlYes, the rich and very rich do contribute a lot to our revenues, but does the average millionaire really need another $100,000 dollars every single year if it means deficits forever? Will that extra money really stimulate the economy more? Even if you make the argument that they could give that money to good causes, most of them aren't doing that (http://motherjones.com/mojo/2011/02/stinginess-rich). It doesn't make sense to give millionaires and billionaires hundreds of thousands or even millions of dollars back when we are in a dire fiscal situation.

Patrick- I've actually thought a lot about pooling money together to create one standard of education. I wonder if it would ever work. This would not necessarily call for higher taxes for the rich, just re-distribution of tax dollars. I firmly believe that the answers lie in child care and education (so obviously I ardently disagree with GOP cuts to Head Start) I still think people are underestimating the progressiveness of the tax system even with the Bush tax cuts (as Professor Eismeier's article points out). Perhaps the services need to become more efficient not more heavily funded.

President Bush and his policies: The War on Terror was going to happen no matter who was president- and that spending can't really be thought of as an economic drag. The Iraq War is different since it’s clearly uniquely linked to President Bush and his administration’s decisions. (Though I guess since the wars were not financed through tax increases at the time, the government was borrowing money to pay for the war. In the past all wars had at least been partially paid for through wartime tax increases, but Bush was loathe to show the full costs of his ridiculous military adventures {editorializing!} so he kept them off his budgets each year. Anyway, since the government debt-financed the war, you could see a “crowding-out” effect of private, more efficient and effective investment- however, I don’t think we see that in the economic data- though I could be wrong. Even so, I doubt the amounts involved would have had a significant impact.) So basically I don’t think the military adventures can be considered a drag on our economy- though they certainly hurt our government’s fiscal outlook for decades to come (interest payments, veterans’ benefits, health care costs, etc.) 2) Bush tax cuts. A deficit is simply the difference between spending and revenues, and Bush increased spending while reducing revenues with his tax cuts. So certainly that hurt the government’s fiscal situation.

The 2001 and 2003 tax cuts added about $1.7 trillion to deficits between 2001 and 2008. Because they been financed by borrowing — which increases the national debt — this figure includes the extra interest costs resulting from that additional debt.This figure also includes the cost of “patching” the Alternative Minimum Tax to keep the tax from hitting millions of upper-middle-class households, a problem the tax cuts helped cause. Over the next decade (2009-2018), making the tax cuts permanent would cost $4.4 trillion, assuming that the tax cuts remain deficit-financed.

And Peter is completely correct that the Bush tax cuts disproportionately benefited the wealthiest few percent in our country- sure, most Americans benefited, but the effects were not evenly shared.Bush’s tax policies have widened the differences in take-home pay between high- and low- and middle-income households, according to Tax Policy Center estimates. When the tax cuts are fully in effect, households with incomes above $1 million receive tax cuts equivalent to an increase of 7.5 percent in their after-tax income. Households in the middle of the income spectrum will receive tax cuts equal to only 2.3 percent of their income. And households in the bottom quintile will gain by less than one percent.Put another way, households with incomes over $1 million will hold a larger fraction of total U.S. after-tax income than they would have received without the tax cuts, while households in the middle and bottom quintiles will hold a smaller share. The tax cuts thus have widened, rather than narrowed, income gaps, making them regressive. The skewed distribution of the tax cuts is of particular concern given that, since 2001, gaps in before-tax income have widened. As of 2006, the highest-income 1 percent of households held a larger share of total pre-tax income that in any year since 1928.Claims that all taxpayers are winners from the President’s tax cuts rest on the false assumption that Congress and the President can provide trillions of dollars in tax cuts without anyone ever footing the bill. The tax cuts have been financed by deficits, and most proposals to extend them include no measures to offset their costs. In the long run, however, it is widely recognized that deficit-financed tax cuts eventually must be paid for. As former Federal Reserve Chairman Alan Greenspan warned, “If you’re going to lower taxes, you shouldn’t be borrowing essentially the tax cut. And that over the long run is not a stable fiscal situation.” Simply stated, funds that are borrowed must eventually be paid back.When the tax cuts ultimately are paid for, the costs will be very large and the choices difficult, especially given the bleak long-term deficit outlook. The cuts cost trillions of dollars, which must be either paid for in higher future taxes or fewer government programs. Of course, government expenditures are very progressive, meaning that for most Americans, keeping the regressive tax cuts at the cost of losing important progressive programs would be a bad bargain.Even if the tax cuts’ costs are eventually paid for through a more balanced package of spending reductions and progressive tax increases, data from the Tax Policy Center show that, on average, the bottom four-fifths of households will lose more than they gain from the combination of tax cuts and the financing for them. That is, once the need to pay for the tax cuts is taken into account, the 2001 and 2003 “tax cuts” are best seen as net tax cuts for the top 20 percent of households, as a group, financed by net tax increases or benefit reductions for the remaining 80 percent of households, as a group.

I think Peter has hit the key point- tax cuts have to be paid for at some point if you wish to keep the current level of government services. Either you increase taxes, or you decide to cut government services. It's not that hard- we need to have a clear, "adult," national debate about what people want- in which they are able to make clear distinctions between programs on the chopping block (Social Security, Head Start, K-12 education, food assitance) versus tax rates (and tax preferences in the code favoring various groups like oil companies and ... high-tech business startups). I think a clearer national debate, which we see in poll data which shows overwhelming support for repealing the Bush tax rates for the wealthiest 2%. There are trade-offs to anything we do- would those tax increases hurt the wealthiest 2% and possibly job creation in the near-term... Yes. That's the cost of doing that, while the benefit is the lowered taxes we are able to preserve for the vast majority of Americans who, as we've discussed, recently experienced decades of declining opportunities and worsening living standards. Also, the programs funded by those increased taxes on the top 2% enable us to pay for programs which could have significant net economic impacts, like transportation or education. Don't people realize how important the nation's highway system was to our economic growth for decades. Aren't people aware of the HUGE positive effects of early childhood education interventions on poverty, crime, and countless other social problems?

I think we are looking at this in too much of a utilitarian way. Is it right that the top two percent bear ALL of the tax burden? Isn't it important for the middle class to have an incentive to reach the highest tax bracket? Patrick aknowledged that many government programs are extremely progressive. So do we just keep making taxes more and more progressive? Eventually this won't work as incentives will get messed up, which is why cutting government programs makes more sense to me than increasing taxes on the wealthy. Progressive government programs paid for by increasingly progressive taxes will bring us closer and closer to the European welfare state. (This is not really addressing the Bush tax cuts as I think the AMT should be raised, but more the argument that the wealthy must keep funding all government programs.)

While Bush decreased taxes with no plan to pay for the cut (I think he should have cut spending in order to balance it) Obama increased spending with no plan to pay for the spending. Both are bad fiscal policy. Just as many economists disagree with Bush that cutting taxes would help the economy, many economists disagree with Obama that government spending is the answer. Just think we're being a little too hard on Bush. I'm not sold on the fact that the increasing wealth of some leads to the decreasing wealth of others except in the cases of cuts to government programs. BUT cuts to government programs would cause a decreasing standard of living regardless of tax cuts, and most of us agree on the fact that government programs need to be cut.

My discussion of U.S. tax policy: Ahh!!! One of my favorite arguments about taxes- clearly the system is wrong and unfair because the bottom 47% of U.S. households didn’t pay income taxes for 2009 (38% in 2008), and the top 10% (in 2006) of all households paid 73% of all income taxes. Also, a family of four making as much as $50,000 will owe no federal income tax for 2009, as long as there are two children younger than 17. "We have 50 percent of people who are getting something for nothing," said Curtis Dubay, senior tax policy analyst at the Heritage Foundation. Let’s take this argument from the top. Well the first obvious question seems to be: what’s the underlying income distribution? After all, if the top 10% pay 73% of all federal income taxes but they make 73% of all the income, then the system isn’t even progressive- merely flat in that everyone pays the same rate. (Spoiler alert- the system is still progressive). For convenience sake, I’ll use date from the Tax Policy Center- the PREMIER, non-partisan non-governmental source for tax data. Many of their most up-to-date figures are based on microsimulations which very closely approximate what there are estimating- the underlying income and tax distributions of the country. See here for the next few statistics I point out (http://www.taxpolicycenter.org/taxtopics/currentdistribution.cfm). The bottom 47% in 2009 paid no income taxes- looking at their charts and splitting the difference (since they provide quintile and not decile estimates), which overestimates how much income the bottom 47% who paid no federal income taxes, we see that the bottom 47% earned less than 20% of all cash income. The top quintile (20%) earned 53.4% of all cash income, so the top decile probably earned around 30% of all cash income and according to the USA Today article paid 73% of all federal income taxes. Having those with 30% of all the income pay 73% of all income taxes sounds a lot better than saying the top 10% pays 73% of all income taxes like the article and many others commonly say. Clearly just looking at the percentage of aggregate income taxes paid by a given % of the U.S. population is limited, because it ignores how income itself is highly concentrated and distributed unevenly. Income taxes also represent the most progressive form of federal taxation, ignoring the more regressive payroll taxes which in 2009 where an almost equivalent source of revenue for the federal government (44% of revenue came from income taxes, 42% from payrolls, and 14% from other sources that are also more regressive than the income tax). So income taxes, even taking into consideration the pre-tax U.S. income distribution, overestimate the progressivity of the federal government’s tax system. (For conservatives and flat-tax advocates, this progressivity is “unfair” because a small portion pays so much of all taxes.) Luckily, the Tax Policy Center incorporates estimates of the impact of payroll taxes on different American households and finds that:

The bottom 20%, with 3.7% of all cash income, pay -0.2% of all federal taxes. (Just to add context, in 2009 the bottom 20% of all household would have been making about $20,453, which for a family of four puts you under 200% of the Federal Poverty Level- obviously these people are raking it in, just like those pesky Welfare Queens Ronald Reagan always talked about- and which no one could ever find!)The 2nd lowest quintile (20-40%) earn 8.6% of all cash income, and pay 3.1% of all federal taxes.The middle quintile earned 14.2% of all cash income, and paid 10.5% of all federal taxes.The 2nd highest quintile earned 20.3% of all cash income and paid 19.2% of all federal taxes. The highest quintile earned 53.4% of all cash income and paid 67.2% of all federal taxes.Does that seem like an excessively progressive tax system??? I think everyone who believes in a progressive would argue that such minimal progressiveness is not what they’ve been led to believe exists with our current tax system. Interesting how media-driven myths cut both ways. This whole question of course ignores the added layer of state taxes, which come primarily from sales and similar taxes and fees (very regressive), and income taxes. According to the Tax Policy Center, even among states with graduated (i.e. progressive) rates, most systems are fairly flat (http://www.taxpolicycenter.org/publications/url.cfm?ID=1001064). Local taxes are primarily are property taxes, which is also a very a regressive tax. So what does that leave us? A very uneven distribution of income across households in the U.S. A moderately progressive federal taxation system. A generally regressive state and local tax system. The Institute on Taxation and Economic Policy (a respected group which, I’ll note, is generally considered leftist) found similar results doing more detailed calculations than what I did (merely pointing out that that state and local sources are primarily regressive taxes) (see http://www.itepnet.org/whopays3.pdf for ITEP study). This regressive second layer further dampens the minimal progressivity of the current federal tax system. And what do conservatives and the general media focus on- income taxes, in order to justify their false worldview that our taxation system is strongly progressive. In the eyes of many wealthy of course, it’s too progressive.

So I’ve hope I’ve debunked the idea that our system is “unfair” in that it’s too progressive, the message implicit in any commentary which points out that so many Americans don’t pay income taxes and others pay huge amounts. Of course, as several of you have said, the Bush tax cuts have also lowered taxes for most middle-income Americans as well. The decline in income taxes on middle-class households in recent years has driven a decline in these households’ overall federal taxes. Households in the middle fifth of the income spectrum paid an average of 14.2 percent of their income in overall federal taxes in 2006, the latest year for which data are available, according to CBO (Congressional Budget Office, “Historical Effective Federal Tax Rates, 1979-2006,” April 2009). This is just slightly above this group’s effective tax rate of 13.8 percent in 2003, which was the lowest level since at least 1979. Most Americans pay more in payroll taxes, which support Social Security and Medicare, than they do in income taxes. Thus, the 14.2 percent figure reflects the impact of payroll taxes far more than income taxes. Many of the articles have also pointed out that due to the impact of the recession and the temporary tax cuts in the Recovery Act, particularly the Making Work Pay tax credit, CBO data for 2009 will likely show that middle-income families faced significantly lower effective overall federal tax rates than in 2006. However, there are important economic arguments for these progressive tax policies during our economic downturn. See this CBO report (http://www.cbo.gov/ftpdocs/108xx/doc10803/01-14-Employment.pdf) and these CBPP reports (http://www.cbpp.org/cms/index.cfm?fa=view&id=3342, http://www.cbpp.org/cms/index.cfm?fa=view&id=3349) and you’ll see that many policies based on providing tax relief for low- and middle-income households have the greatest simulative effect and “bang-for-the-buck.”

and now I'll move on to Professor Eismeier's most recent posted articles (which I haven't had a chance to read yet)

Well, it's my bedtime and I haven't finished the 50-page NBER paper (ok- it's only about 30 pages if you ignore the references), but so far I don't think it disproves any of the arguments I personally made, with one possible exception. (Because the article is written by Gordon makes me confident in its general quality- he’s a great economist, plus his readers included David Autor, Rebecca Blank, Lawrence Mishel, and Lawrence Katz who are also excellent.) Where I may have been wrong (I’ll have to look more in-depth to confirm) is the inequality trends since 2000. He argues against there being increasing inequality since 2000 if you look at his refined model of the productivity to prosperity relationship. However, I’d note that I think there are alternative inequality perspectives which might still find that inequality has increased since 2000. But I’ll research that more (for my own personal interest as well). He also at times discusses the potential impact of the recent downturn on these inequality questions, which I also think is a really fascinating question. However, mostly the article is arguing that popularized (read: liberal, lay) arguments that we've seen about increasing inequality are exaggerated. That isn't something I dispute- in fact, I was aware of these perceptions among many economists (they often point out the flaws on the Saez-Picketty studies which are often cited by liberals as showing increasing inequality). I thought I alluded to this when I discussed the two arguments for why we might be seeing increasing inequality in the top .1% of American society. Here’s what I said: “Generally I question any argument looking at more than the top 1%, and I think it’s more narrow- either .1% or less of the American population experiencing unusual income and wealth accumulations.” I then provided possible explanations for this inequality trend that I was much more certain of- and which so far in my reading Gordon has not disproved or argued against. In fact, near the end Gordon discusses a version of the CEO/finance hypothesis I discussed as being a recent development in the literature. I still need to look into his arguments about poor vs. rich price indices- something fishy there. And some of his arguments seem to be saying there is increasing inequality as seen by macro-data, but that it’s based on confounding factors unrelated to inequality. He’s arguing that the inequality is attributable to factors like life expectancies that vary by early education factors and the like. While that might not be what we traditionally think of when we consider inequality, I’d argue that it’s still under the umbrella understanding of inequality and its effects.

PL, that 47% don't pay income tax is not a matter of unfairness to the rich. It's just a fact that over a long period of time administrations (mostly Republican)have pursued a policy of reducing/eliminating income tax on lower income through rate reductions, expanding earned income tax credit, and expanded child credit.

As several articles suggest, I don't think it's very useful to devote psychic and policy energy fretting about the top 1% or top .1% of income earners. They are certainly rich, but taxing them more will not do much about our fiscal woes. (How much would Chuck Schumer's millionaire's tax have raised?). The solution to fiscal crisis is simple if difficult: tax most Americans (except poor) a bit more; make mature Americans pay a bit more and get a bit less for medicare; slightly reduce the rate of growth in cola increases for social security; gradually change eligibility for social security and medicare to reflect current life expectancies.

Of course, all of this will be easier if we have more economic dynamism, which (as President Obama nows says) will require pruning government regulations. While we are at it, we might also straighten out the mess we have made of federalism over the last 50 years.

Mostly I see agreements between us (I think). I still want to stress that federal income tax statistics ignore the other taxes people pay (which are far less progressive than the current federal income tax, and I suspect actually nearing being regressive): federal payroll, all corporate income taxes (which get passed on to consumers, managers, and shareholders of all affected firms), state sales taxes, state income taxes, local property taxes, and the “fees” so many states and localities collect. This paper discusses why so many Americans don’t pay income taxes- and it agrees with your arguments that it’s largely due to deliberate tax policy favoring these groups (plus the recession). http://www.taxpolicycenter.org/UploadedPDF/412106_federal_income_tax.pdf However, I don’t think this is a bad thing. Even if you just take into account federal payroll taxes, you find that “Counting income and payroll tax liabilities, less than a quarter owe no tax.” These people aren’t exactly rolling in the dough, and these tax credits help keep millions of Americans out of poverty (I know it’s probably perceived as bad taste for me to cite the CBPP, but here’s our report on this: http://www.cbpp.org/files/1-5-11pov.pdf. If you turn to page 2, you’ll see the large effects of the specific tax policies you discuss: EITC and child tax credit). I think you’re arguing in favor of tax increases except for the poor- I guess I’d want a slightly broader spectrum protected from tax increases. However, I completely agree that tax rates are unusually low right now and that’s not sustainable if we want to maintain a level of government services even approaching what we currently have. I personally think Obama’s promise not to raise taxes on anyone but the top 2% is foolish and incompatible with his arguments in favor of robust government programs for the safety net, infrastructure, education, Medicare, Social Security, Medicaid, etc. It’s not possible to have historically low taxes on vast amounts of Americans and maintain such a strong government presence. So I certainly support making these tough choices between programs and taxes more clear for Americans- and I’d probably argue that until we control health care costs we need to maintain our historically normal level of government programs by increasing taxes on middle-class Americans. I think Obama wants the same programs as I do (generally), which makes his tax promise stupid, disingenuous, and not productive for the making tough decisions. I’m still not certain I like the lame duck deal Obama and Republicans passed- while it was an economist stimulus, it’s adding $800 billion dollars to our deficits over 2 years and it’s pushing the decision to an election year. My hope is that Obama will refuse to extend the Bush tax cuts for the wealthiest 2%, and that Republicans will refuse to let them expire, which means that all of them will expire. I think that’s the fiscally responsible thing to do.

As for taxing the wealthy more (whether Obama’s 2% or the .1% that you, I, and others have discussed), the argument might be that increasing those rates are an example of a hard decision, but a low-hanging fruit where the consequences are less than making other tough decisions- whether that be cutting safety-net programs, defense, or education investments. Also, they are a sizeable source of revenue, though I think the point you were making that they aren’t enough and completely overwhelmed by the revenues gained by increasing taxes for middle-class Americans is completely accurate.

My response to your solutions for solving our fiscal mess:

“tax most Americans (except poor) a bit more”- sounds good to me, when balanced with making serious efforts on the spending side which I acknowledge we need to do

“ make mature Americans pay a bit more and get a bit less for medicare”- I’d favor some increases in cost-sharing, but I think there’s only so much we get this way because most elderly Americans live very modestly (many are just over the conventional poverty line for instance). Trust me though, I completely agree with one of these suggested policy changes (implicit) arguments- that if we don’t increase the pay-in of older Americans, then what will actually occur as part of addressing our nation’s fiscal crisis will be a dramatic transfer of wealth, potential income, living standards, and prosperity from Americans of my generation to older Americans. Without taking modest steps to increase the contributions made by older Americans, we will see an EXTREME inter-generational transfer of prosperity. All we can hope to do is moderate that flow, and try to make the impacts of our fiscal problems more equitable in their impact across generations.

“ slightly reduce the rate of growth in cola increases for social security” – I agree with this, though I think you and I might disagree about how much to reduce the COLA increases. Certainly the .3% reduction to compensate for the flaws in how it measures inflation and living standard cost increases (at least I think that’s where the common .3% reform figure comes from) is reasonable, though I’m not sure how much further we could cut the COLA because what it implicitly does is hurt those Americans who live longer as the reduced COLA slowly starts eating away at their Social Security payments. I’d support more than .3% reductions in COLA payments if some program was established to somehow ensure that Social Security recipients who live for a long time but are of modest background have “insurance” against that outcome. (Basically some back-end program that kicks in for those elderly who live for a long time and have lower annual Social Security benefits).

“gradually change eligibility for social security and medicare to reflect current life expectancies.”- the problem with doing this too much is that increase in life expectancies are very skewed (generally the aggregate increases we see reported mostly consist of significant increases in the life expectancies of more affluent Americans. I’m pretty sure Gordon discusses this fact in a different way in his article).

Adding to your list, I’d suggest applying more pressure to defense expenditures in order to increase efficiency in that area- Defense and Security spending is one area I think were accusations of government waste, just because the way the programs operate and the amount of funding the Bush Administration allowed to flow into these areas has created waste and fraud. These areas also lack the amount of oversight and basic accounting standards that other areas of government have to follow. I’d also eliminate or reduce many tax expenditures, including “middle-class” ones like the mortgage and health insurance deduction that disproportionately benefit more affluent Americans (I’d change these by capping how much benefit can be claimed from them- increasing the progressivity of these credits). This will allow us to mitigate any tax rate increases we need to raise revenue. Unfortunately, I doubt all these interventions would completely solve our government’s fiscal problems- which in the long-term are directly tied to rising health care costs across the entire (private and public) American health care sector. We need to get our levels of spending down to our peers that maintain equivalent quality of outcomes. This comparison shows us that we should be able to control costs and make these adjustments painlessly (in that people’s outcomes won’t suffer). To do this, we must fully fund the Affordable Care Act. The Republican efforts to repeal and defund it are extremely detrimental to controlling deficits- this is demonstrated by the recent CBO report (http://www.cbo.gov/doc.cfm?index=12069). I’m happy to defend the CBO studies, since I know Republicans in Congress question their results as being false. For now, I’ll just note that the CBO couldn’t score cost savings for many things in the Affordable Care Act because they didn’t have enough evidence they felt to justify quantifying savings. However, there are many components of the act which have the potential to add to the savings CBO has already estimated the bill will create. We need to add to ACA as well- there are more opportunities to extract savings from the system. Any success we find from ACA’s test projects need to be quickly brought-up-to-scale nationwide. We need to promote more innovation. And if that doesn’t work in the next decade, then I think we have no choice but to move towards a greater role for the government in health care. ACA’s failure would be a failure of a hybrid (public/private) system. There is no successful private model that we can look to for evidence that it can succeed. Any private system similar to our needs is incredibly regulated, far more than even the ACA involves. It’s a essentially a public system using private agents. Those models are successful. Or we can move to a system with single-payer, or even the British system of complete nationalization of the sector. All of these models have been successful for decades across multiple countries. I don’t deny that they have had their problems, but they are clearly superior to our current model, and we have no evidence for a fully privatized system which an element of conservatism/libertarianism currently argues for (see Regina Herzlinger for instance from Harvard for a policy advocate for private-efforts).

And I just remembered that I forgot to fully respond to your point about usual wealth and income accumulations among the top .1%. You said "As several articles suggest, I don't think it's very useful to devote psychic and policy energy fretting about the top 1% or top .1% of income earners. They are certainly rich, but taxing them more will not do much about our fiscal woes."So far I think I've basically said we should tax them more because they are a possible low-hanging fruit where it's less destructive to the overall income to raise their taxes to be more in line with historical averages. That ignores the question of whether it's worthwhile putting energy into addressing the conditions which are creating this unusual accumulation of wealth and income among the top .1%. I don't have a full argument at this time, but I'd note I think these accumulations could be connected to the recent economic downturn. Who is accumulating wealth and what are their incentives? Arguably those working in the financial sector, and there is an argument (which I don't fully know off the top of my head) which argues that their incentives are to try to acquire massive amounts of personal income and personal wealth- which may in the long-run lead to excessive risk taking (since taking risks is part of acquiring the wealth that is their career goal for themselves). Their collective actions don't take into account fully the costs and factors we might consider from a macro-economic argument, so this small # of individuals have the incentives to make economic decisions that increase the volatility and potential for economic crises- similar to the one we recently saw with the derivatives markets. Accordingly, if we successfully taxed these people's wealth or somehow altered the market they operate in so they couldn't accumulate such wealth (which would in effect reduce the inequality), we might actually be making a smart decision for our overall economy. This might be a basis for the financial speculation tax which Dean Baker from CEPR has argued for (which he estimates could raise $150 billion in revenues a year- not huge, but still some tidy change). A similar system is already in place in England, which still remains a major financial center even with the tax. Also, I never discussed your point about regulations. I sorta agree, sorta disagree in that I think we often discount the social benefits from these regulations. However, there are definitely lots of little ones that could be repealed or limited to promote further growth- and i can guarantee you this is something Obama is sincerely interested in because it's a painless way (for him) to promote the growth he needs to get reelected. However, there are some regulations that he's signaled he won't retreat on (environmental ones for instance). I often think regulations, particularly environmental ones, are really ways to achieve an outcome (lower greenhouse emissions for instance) that can't be accomplished through passing legislation through an opposed Congress. Many times the goal of the regulation is good, but I think it'd be more efficiently achieved through a more direct program (as compared to regulations or taxes). But since the politics are too difficult, the executive decides to just pass an executive order/agency regulation. So I think it's understandable why we have many regulations, and I'm not sure their important objectives should be sacrificed indiscriminately for wishful estimates of the impact of eliminating regulations on economic growth. I think the Bush administration's policy (in conjunction with Congress and the FED) on regulating the housing and financial sectors are two great examples of where we needed the regulations on the books to be enforced because they are important to preventing things like the worst economic decline since the Great Depression.

In case anyone's interested, here's an article from Dean Baker discussing tax policy (which we discussed on this blog post) including his financial speculation tax. He also talks about some of his policy ideas which are very unusual (not in that they're extreme, but just that most policy experts don't think about them- for instance, he's a big person on intellectual patent rights).Just as a note, I keep abreast of Baker's writings but I admit I don't feel qualified enough to evaluate many of his ides because they are so economics heavy, but are in non-traditional policy areas Because of this, I don't have the usual broad base of general policy debates between think tanks and media outlets to draw upon in evaluating his ideas. I just know that he's a very original thinker- which doesn't preclude the possibility that he's a quack. I would note that he was one of the few economists to recognize the housing bubble years in advance and try to raise awareness, so he was clearly brilliant on one issue where the broad field of economics failed miserably.